Bitcoin trading only worsens El Salvador’s already weak sovereign credit outlook, according to Moody’s Investor Services.
Bitcoin trading “is quite risky, especially for a government that has struggled with liquidity pressures in the past,” said Moody’s analyst Jaime Reusche. He added that the government’s current holdings of Bitcoin “certainly add to the risk portfolio.”
Present-day El Salvador has around 1,391 bitcoins, which at current prices is just under $60 million. This amount clearly does not pose a major risk to the government’s financial stability, but this could be compromised by even larger purchases. “If it gets much higher, it poses an even greater risk to the issuer’s repayment capacity and tax profile,” Reusche said.
While President Nayib Bukele said he buys Bitcoin through his phone, the government has not released any official data on his holdings. In anticipation of El Salvador becoming the first country to accept Bitcoin as legal tender in September, Bukele first purchased the cryptocurrency over the summer. Bukele then highlighted other purchases he has made, buying the dip on successive price declines in the second half of last year. Moody’s estimates that El Salvador’s bitcoin holdings could decline by around $10-20 million at current market prices.
Bitcoin and bonds
One particular reason for concern is an $800 million bond issued by El Salvador that will mature in January next year. Because it currently trades at 0.78 to the dollar, it has a high yield of over 35%, preventing the government from accessing foreign bond markets.
According to Moody’s, all these factors, together with an incomplete agreement with the International Monetary Fund, have increased El Salvador’s risk of default. Last July, Moody’s downgraded El Salvador to Caa1, reflecting “very high credit risk”, citing “deteriorating quality of policy making”.
Despite these assessments, Finance Minister Alejandro Zelaya believes Bitcoin adoption has attracted foreign investment to the country. Last week, he introduced bills to the nation’s legislature that would provide a legal framework for issuing a 10-year, $1 billion dollar-denominated bond with a 6.5% coupon Issued via Blockstream’s bitcoin settlement system known as Liquid Network, the government intends to use the funds to further facilitate the use of bitcoin in the country.
“A decent amount of bitcoin bonds could potentially help them deal with their liquidity pressures,” Reusche conceded. However, “unless bitcoin bonds are very well received and oversubscribed, we see the likelihood of the need to restructure their traditional market bonds increasing.”
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